Lessons to Learn from Bezos?

A recent article in the Wall Street Journal discussed Jeff Bezos’ strategy for Amazon to remain successful and continue to innovate and lead the charge in changing the online shopping landscape.  By offering Sunday delivery, Amazon is setting itself apart from its competitors and helping a declining US Post Office to remain competitive in the shipping market.  Ultimately, Amazon is hoping this strategy will force its competitors to adopt the same service, changing the market for online retailers. 

How can this strategy apply to law firms?  For several years now, there has been discussion over how clients are no longer willing to pay for the training of junior associates and law firms can no longer use the leverage model to absorb the costs of training new attorneys into client bills.  Clients have begun demanding flat fees, volume discounts, frozen billing rates, and other components to lower their legal costs.  What if law firms began not charging for first year associates?  What if firms absorbed the cost of each new class of associates each year in an effort to maneuver clients away from the volume discounts and other lower cost requirements and back to the traditional pricing of billable hours?  What effect would this have on the industry?

First, law firms would need to examine their hiring needs more closely, and alter their hiring strategy to be able to afford absorbing these new salaries.  Also involved would be a revamp of the summer associate program, making it less about lunches and events and more about substantial training and rigorous evaluation to identify the candidates who would bring the most value to the firm as a full time associate.  They would need to restructure the costs associated with hiring, such as recruiting events, travel, events, programs and summer associate salaries – if the firm would not be able to offset these costs by billing out first year associates at high rates, they would need to strictly adhere to a lower budget and evaluate the value generated from these costs.  Another possibility would be decreasing the number of summer associates hired, and looking at the utilization rates and determining how many associates would they need to manage the workload at close to 100% utilization. 

Second, firms would need to examine how they staff deals, their workforce requirements and salary structure for associates.  Would they maintain the same billing rates starting with second year associates or would changes need to be made?  Are deals being staffed efficiently or are there pockets of overutilization and underutilization?  How would the salary structure of associates change?  Would they maintain a lockstep progression, would they lower the salary increases, or would they change to a merit based promotion system?

Third, what effect would one or two firms changing their policy have on the legal market?  Would that be enough to cause other firms to follow suit?  Or would there need to be a larger contingent in order to cause change?  Or would it depend on the size of the firm making these billing changes? 

Another way this strategy can be applied is by law firms adopting residency or apprenticeship programs, for the first, second and/or third year associates.  Greenberg Traurig recently announced that they were adopting a secondary first year associate residency program for law graduates who may have not been chosen through the traditional on campus recruiting hiring.  This group would earn a lower salary than the regular first year associates, but would have the opportunity at the end of their first year to be promoted to the regular associate track.  This two tier system may be effective, but what if a firm eliminated the traditional first year associate program completely, in favor of a year-long residency training program for the law graduates they recruit through traditional on campus hiring?  These attorneys would not be billed out to clients, although they would be working on the matters, and would have a full program of work experience as well as extensive training for the entire first year.  This program would effectively have the firm be responsible for the costs of training junior attorneys while enabling clients to have only extremely well trained attorneys working on their matters.  What if the residency was a two or three year program, including a portion where each attorney would be seconded to a key client?  This way the training these attorneys would receive would be both in firm and in house, and can be used as a client service and marketing tool.  What effect could this trend have on the market?  When clients compare using the services of different firms, would the knowledge that one firm had this residency program and another didn't have an effect on which firm they would choose?  

Is this the Future Law Firm Landscape?

With the recent announcement of the LeClairRyan UnitedLex partnership, I wonder if this is the direction that law firms are going, if it will work, and how it will work.  If this becomes a trend, what will the legal market landscape look like?  Here are a few thoughts:

Segmentation of the market into four groups:

1. Mega firms whose revenues will be insulated through their breadth of services, diversification of geographical presence, and efficiency from economies of scale.
2. Full-service firms who either partner with existing LPOs or create their own in-house (which many firms have already done).  With LPOs resonating with clients and cornering a larger corner of the legal market, particularly in historically profitable work that traditional law firms not only handled but relied on to sustain their leverage model, law firms will see their yearly revenues steadily decrease and profitability become more and more at risk.  With falling profits comes lower profits per partner and ultimately, defections and economic instability.  Firms will have no choice but to change their model and adapt one that meets clients’ needs to prevent them from using other legal providers.
3. Boutique or specialized firms whose revenues are protected by charging a premium for cutting edge, complex, bet the company work.
4. The rest of the AMLaw100 who will either be forced to merge, be acquired by other firms or who will collapse as a result of partner defections caused by year over year falling revenues and decreased profits.

This segmentation will have effects in not just firm structures, but also how they operate:

Practice:  The first tier will need to maintain and even grow the breadth and depth of their practices in order to stave off competition for business from tiers 2 and 3.  The second tier, with the addition of the LPO component, will need to evaluate the profitability of their practices and eliminate those with lower profits in order to offset the cost of operating the LPO component and revenues lost to the 1^st tier and stand-alone LPOs and other third party vendors.  The third tier will need to maintain their excellence in their boutique areas, which will entail lateral hiring and possible increased partner salaries/guarantees to obtain and maintain top talent.

Technology:  All three tiers will need to ensure that they are taking full advantage of the technological advances, including e-billing, e-discovery, pricing software, and other key technologies that increase efficiencies and lower costs to the client.  This may include partnering with a third party vendor or establishing greater infrastructure in their in-house IT departments. 

Business Development/Marketing:  Firms in all three tiers will need to expand their marketing and business development departments to account for the greater competition in the market, alternative pricing needs and new requirements from clients.  Some may employ sales professionals to effectively sell services to potential clients to eliminate the lost revenue dollars of having partners with high billing rates making these pitches.

Recruiting:  With the segmentation of the market, firms in the three tiers will need to focus their recruiting strategy on specific practices, honing in on the value of each individual attorney candidate at both the entry level and lateral levels.  Firms in the first tier may still maintain their broad spectrum hiring, while firms in the second and third tiers may need to eradicate their wide net recruiting and develop a more tactical approach.  It may include only entry level hiring for certain practices, while others only require experienced hires, or only looking at candidates with specialty training, or having two tiers of recruiting for the traditional law firm division and the LPO division.

Finance/Accounting: Firms in the second tier may structure the LPO division as a separate legal entity with its own P&L, revenues and compensation system to delineate the difference between the services provided by the LPO and the traditional law firm practice.  Firms in all three tiers will need to develop further and better utilize big data such as key performance indicators, matter cost evaluation, profitability analysis and other key metrics.

The market has already become a buyers’ market which will continue as clients look for lower cost and efficient legal solutions.  However, once the legal industry alters its business model to operate as efficiently as possible as a result of this pressure from clients, companies may be able to handle their legal work at a lower cost by using outside counsel rather than handling in-house due to inefficiencies, redundancies, outdated technologies, and inflated salaries.  The market then may turn to back to a sellers’ market and the reconfigured law firms will once again be able to set their own rates and inflate the prices of their services until in-house counsel adapts their own internal legal department processes.